Tax Cuts and Jobs Act strains IRS resourcesThe Tax Cuts and Jobs Act is going to be a "heavy lift" for the IRS, National Taxpayer Advocate Nina Olson has told Congress. The agency is strapped for cash and already has a huge workload, Olson sai...

Holidays are right around the corner and that means millions of people are online shopping. Identity theft is something the IRS, state tax agencies and the tax industries are concerned about. There are various ways scammers are able to obtain personal and sensitive information and these are tips on how to better protect you while doing not only shopping, but numerous every day activities.

Tips to keep protected online:

Protection: Shop on websites you know are protected or familiar retailers.

Wi-Fi: When in public areas that supply Wi-Fi make sure the connection is protected. A wrong click to a website or ad could potentially give scammers your information especially when making online purchases.

Passwords: Passwords should be made up of various letters, numbers, and special characters. A phrase or saying could be used. Of course, longer the better and using different passwords for every account. To help with keeping passwords safe and recalling them a password manager can be used.

Virus protection: Keeping your virus software up to date. Setting up an automatic update is a good way to make sure your computer is free from any malware or viruses.

Authentication: Taking advantage of higher security offered by numerous financial institutions, sites, and apps, often referred to as multi-factor authentication, which is to protect you from scammers trying to access sensitive information by asking for a code, usually sent to a mobile phone. Financial institutions offer text messages or emails be sent when unusual activity or account information has been changed.

Scammers aren’t limited to just cyber-attacks around the holidays and tax season. Phishing emails and phone calls are another way for scammers to obtain information in a cunning way, mimicking not only the IRS but retailers, financial institutions, or even friends/family giving them access to you all year round.

Phishing emails can be disguised fairly well except there’s some minor differences to look out for. Email addresses can be slightly altered such as a simple letter changed in the address to trick people into opening the email and any links attached. Opening the hyperlinks can take you to a fake site looking similar to a legitimate page and asking for you to fill out and give away personal information. Downloading PDF’s from suspicious emails may contain malware or viruses.

The IRS will not call or email asking for financial, personal, or sensitive information. IRS scammers will call saying you owe money or there is a lawsuit and demand money usually from a debit card. Those are the most common types of phone calls received from IRS scammers.

Taking every action to prevent identity theft will give you assurance that no one has stolen your identity but also no fraudulent tax returns will be filed under your name creating chaos with the IRS.

The 2018 filing season for 2017 tax-year returns officially launched on January 27. On the other end of the filing season, taxpayers have two additional days to file their 2017 returns: the traditional April 15 filing deadline moves to April 17 this year. Some early filers, however, may find their refunds delayed if they are claiming the additional child tax credit (ACTC) and/or the earned income tax credit (EITC).

The 2018 filing season for 2017 tax-year returns officially launched on January 27. On the other end of the filing season, taxpayers have two additional days to file their 2017 returns: the traditional April 15 filing deadline moves to April 17 this year. Some early filers, however, may find their refunds delayed if they are claiming the additional child tax credit (ACTC) and/or the earned income tax credit (EITC).

Unlike some past years, the IRS goes into the filing season without having to make too many changes to the Tax Code. The heavy haul will come this year, as the IRS implements the countless changes to the Tax Code in the Tax Cuts and Jobs Act. Former IRS Commissioner John Koskinen recently said that he worries the agency will have adequate resources – personnel and monetary – to push out the necessary guidance for the Tax Cuts and Jobs Act. "It’s a challenge," Koskinen said.

Comment. The January 27 launch comes just a few days before the mandatory January 31 deadline for employers to file certain information returns. Forms W-2 and W-3, electronic and paper, are due to the Social Security Administration by January 31. Forms 1099-MISC, box 7 (for non-employee compensation) are due to IRS by January 31.

Filing deadline

April 15 falls on a Sunday this year. As a result, the filing deadline moves to Monday, April 16. However, April 16 is a holiday – Emancipation Day – in the District of Columbia. This moves the filing deadline to Tuesday, April 17.

Comment. Legal holidays in the District of Columbia affect the filing deadline not only in the District of Columbia but across the nation.

Refunds

Tax laws do not allow the IRS to issue immediate refunds to taxpayers claiming the ATC and/or EITC. The IRS predicted that refunds related to be the ACTC and/or EITC will be deposited in taxpayer accounts or on debit cards starting February 27, 2018, approximately one month after the launch of the filing season. Taxpayers will need to choose direct deposit, the IRS explained, to get refunds deposited as quickly as possible.

As in past years, the IRS predicts that nine out of 10 refunds will be issued in fewer than 21 days. The agency reminded taxpayers that many financial institutions do not process payments on weekends or holidays. This can result in further delays.

Comment. Presidents’ Day falls on Monday, February 19. Many financial institutions will be closed over the three-day weekend, a reason the IRS gives for the late date for some refunds when compared to last year.

Scams

The start of the filing season also brings an uptick in refund fraud. Criminals file fraudulent returns early in the filing season before taxpayers file their legitimate returns. The Treasury Inspector General for Tax Administration (TIGTA) recently cautioned taxpayers to be on "high alert" for identity theft and refund fraud.

Much-anticipated withholding tables for 2018 have been posted by the IRS. While the new withholding tables are designed to work with existing Forms W-4, the agency encouraged taxpayers to use its online withholding calculator to make adjustments if necessary. New Forms W-4, Employee’s Withholding Allowance Certificate, will be released for 2019 withholding; withholding for 2018 will adapt to existing Forms W-4 already submitted by employees. Based upon the specific impact of the new tax law on their situations, some employees may wish to file a revised Form W-4 to supplement revisions to the withholding tables already being made by the IRS.

Much-anticipated withholding tables for 2018 have been posted by the IRS. While the new withholding tables are designed to work with existing Forms W-4, the agency encouraged taxpayers to use its online withholding calculator to make adjustments if necessary. New Forms W-4, Employee’s Withholding Allowance Certificate, will be released for 2019 withholding; withholding for 2018 will adapt to existing Forms W-4 already submitted by employees. Based upon the specific impact of the new tax law on their situations, some employees may wish to file a revised Form W-4 to supplement revisions to the withholding tables already being made by the IRS.

The IRS’s online withholding calculator is being reprogramed for the Tax Cuts and Jobs Act. IRS officials told reporters in Washington, D.C that the updated withholding calculator is expected to be online in February. The guidance also sets the rates at 22 percent for optional flat-rate withholding on supplemental wages below $1 million, at 37 percent on supplemental wages on $1 million and above, and 24 percent for backup withholding.

Background

The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. For each exemption or allowance claimed, an amount equal to one personal exemption, prorated to the payroll period, is subtracted from the total amount of wages paid. This reduced amount, rather than the total wage amount, is subject to withholding.

A withholding table shows employers and payroll service providers how much federal tax to withhold from employee paychecks, given each employee’s wages, marital status and the number of withholding allowances claimed. Employees provide their employers with Form W-4 so employers can withhold the correct amount of federal tax.

The Tax Cuts and Jobs Act overhauls the Tax Code. The new law lowers individual income tax rates, revises the child tax credit, repeals the personal exemption deduction, and makes countless other changes.

Withholding for 2018

For 2018, the amount of one withholding allowance on an annual basis increases to $4,150. The amount of one withholding allowance on an annual basis for 2017 was $4,050.

For 2018, the withholding allowance amounts by payroll period are:

Weekly: $79.80

Biweekly: $159.60

Semimonthly: $172.90

Monthly: $345.80

Quarterly: $1,037.50

Semiannually: $2,075

Daily or miscellaneous (each day of payroll period): $16

The IRS instructed employers and payroll service providers to start using the new withholding tables as soon as possible, but no later than February 15, 2018. Until employers and payroll service providers implement the revised withholding tables, they should continue to use the 2017 tables, the IRS added.

Form W-4

Taxpayers will not need to complete new Forms W-4 immediately. "The new withholding tables are designed to minimize taxpayer burden as much as possible and will work with Forms W-4 that workers have already filed with their employers to claim withholding allowances," the IRS explained. Further, transition rules temporarily permit employees to claim exemption from withholding for 2018 by using 2017 Form W-4. The deadline to claim exemption from income tax withholding in either case has been extended to February 28, 2018.

In the meantime, taxpayers should check their withholding, the IRS recommended. "Taxpayers who itemize their deductions, couples with multiple jobs or individuals with more than one job are encouraged to review their situation," the IRS explained.

Comment. "The new withholding guidance, developed jointly by Treasury's Office of Tax Policy and the IRS, was constructed to work within the constraints of the existing payroll withholding system in order to deliver the benefits of the tax cuts as soon as possible, to as many Americans as possible, and with as little disruption as possible," Treasury Secretary Steven Mnuchin told reporters in Washington, D.C. "The withholding tables are designed to work with the Forms W-4 that workers have already filed with their employers. This will minimize burden on taxpayers and employers," he predicted.

Comment. Senate Finance Committee ranking member Ron Wyden, D-Oregon, has asked the Government Accountability Office (GAO) to review the new withholding tables and determine if the tables "would result in the systematic underwithholding of federal taxes from employee paychecks." Wyden and other Democrats in Congress have voiced concerns that the White House is "politically interfering with the development of the 2018 withholding tables."

Supplemental wages

An employee may receive, in addition to regular wage payments, supplemental wages. If supplemental wages are paid concurrently (for example, in a single payment) with regular wages, and the employer does not specify the amount of each, the supplemental wages are combined with the regular wages for the pay period for purposes of determining the proper withholding amount. If the supplemental wages are not paid concurrently with regular wages, or if they are paid concurrently but the employer specifies the amount of each, two different methods of calculating the amount of withholding on the supplemental wages are available. If supplemental wages exceed $1 million during the calendar year, the excess is subject to withholding at 37 percent, effective this year, the IRS explained.

President Trump signed legislation on January 22 to delay the medical device excise tax, the health insurance provider fee and the excise tax on high-dollar health plans. All three taxes were delayed in a temporary funding bill.

President Trump signed legislation on January 22 to delay the medical device excise tax, the health insurance provider fee and the excise tax on high-dollar health plans. All three taxes were delayed in a temporary funding bill.

ACA Taxes

The Affordable Care Act (ACA) created all three of these taxes. Since passage of the ACA, many stakeholders and lawmakers have called for their repeal or delay. Several years ago, Congress delayed the three taxes. Delays of the medical device tax and the health insurance provider fee expired after. The “Cadillac tax” on high-dollar employer plans had been scheduled to be imposed starting in 2020.

The new year brought renewed calls for further delays, especially the medical device tax. Without another delay, taxpayers would be liable for the first payment under the medical device tax before the end of this month.

Comment. Manufacturers or importers of medical devices are responsible for paying the excise tax. The excise tax is reported on Form 720, Quarterly Federal Excise Tax Return. Semi-monthly deposits are generally required if tax liability exceeds $2,500 for the quarter. This payment would have been due January 29.

Further Delays

Under the new law, all three ACA taxes are again delayed. The medical device tax is suspended for 2018 and 2019. The health insurance provider fee is delayed for one more year. The excise tax on high-dollar health plans will now take effect in 2022.

"We applaud Congress for delaying the excise tax on high-dollar health plans, James Klein, President, American Benefits Council, said. “We will continue efforts to fully repeal this tax and appreciate that Congress has passed this two-year delay as a down payment for full repeal," Klein added.

The excise tax on high-dollar health plans has supporters. “The tax is a really important health policy and fiscal policy. Could be reformed or replaced with an alternative instrument. But should not be delayed yet again,” Jason Furman, Past Chair, President’s Council of Economic Advisors, tweeted.

Extenders

Now that Congress has delayed the three ACA taxes, some lawmakers are looking to attach a package of “extenders” to the next funding bill. A number of extenders expired after 2016, including the higher education tuition and fees deduction, the Indian employment credit, and incentives for biodiesel and alternative fuels.

The funding bill runs through February 8 but the Affordable Care Act extensions/delays won’t change. Lawmakers will need to pass another temporary or long-term funding bill to keep the IRS and the federal government open after February 8.

TheTax Cuts and Jobs Actdid not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

Capital gains rates

The maximum rates on net capital gain and qualified dividends are generally retained after 2017 and are 0 percent, 15 percent, and 20 percent. The breakpoints between the zero- and 15-percent rates ("15-percent breakpoint") and the 15- and 20-percent rates ("20-percent breakpoint") are generally the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the new C-CPI-U factor in tax years beginning after 2018. For 2018:

the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount ($38,600) for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals; and

The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

“Zero” rate. In the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such gain is not taxed.

Comment. The breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15-percent breakpoint at $77,400 rather than $77,200; and, more significantly, 20 percent at $600,000 rather than at $479,000. Instead, they continue the alignment themselves more closely to the prior-law rate brackets.

Comment. As under prior law, unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent. In addition, an individual, estate, or trust also remains subject to the 3.8 percent tax on net investment income (NII tax).

Kiddie tax

Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the "kiddie tax" is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. A child’s "kiddie tax" is no longer affected by the tax situation of his or her parent or the unearned income of any siblings.

Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. For 2018, that means that the 15-percent capital gain rate starts at $2,600 and rising to 20 percent when $12,700 is reached.

Carried interest

Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment. Under new Code 1061(a), if a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats carried interest as short-term capital gain—taxed at ordinary income rates— based on a three-year holding period instead of the usual one-year period.

SSBIC rollovers

For sales after 2017, the new law repeals the election to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sale proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC). Prior to 2018 under former Code Sec. 1044, C corporations and individuals could elect to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sales proceeds within 60 days to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).

Like-kind exchanges

Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017 (Code Sec. 1031(a)(1)). Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and nondepreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.

Code Sec. 199A deduction

The concept of capital gain is intertwined within the new passthrough deduction for partnerships, S corporations and sole proprietorships under Code Sec. 199A in several ways. A noncorporate taxpayer can claim a Code Sec. 199A deduction for a tax year for the sum of—

(1)

the lesser of —

(a) the taxpayer’s "combined qualified business income amount"; or

(b) 20 percent of the excess of the taxpayer’s taxable income over the sum of (i) the taxpayer’s net capital gain under Code Sec. 1(h) and (ii) the taxpayer’s aggregate qualified cooperative dividends; plus

Comment. As a result, the Code Sec. 199A deduction cannot be more than the taxpayer’s taxable income reduced by net capital gain for the tax year, making monitoring of capital gains a “must” for some taxpayers.

The Tax Cuts and Jobs Act increases bonus depreciation rate to 100 percent for property acquired and placed in service after September 27, 2017, and before January 1, 2023. The rate phases down thereafter. Used property, films, television shows, and theatrical productions are eligible for bonus depreciation. Property used by rate-regulated utilities, and property of certain motor vehicle, boat, and farm machinery retail and lease businesses that use floor financing indebtedness, is excluded from bonus depreciation.

The Tax Cuts and Jobs Act increases bonus depreciation rate to 100 percent for property acquired and placed in service after September 27, 2017, and before January 1, 2023. The rate phases down thereafter. Used property, films, television shows, and theatrical productions are eligible for bonus depreciation. Property used by rate-regulated utilities, and property of certain motor vehicle, boat, and farm machinery retail and lease businesses that use floor financing indebtedness, are excluded from bonus depreciation.

Timing Details

The 50-percent bonus depreciation rate applicable before the new law took effect has been increased to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The 100-percent allowance continues for five years, after which it is then phased down by 20 percent per calendar year for property placed in service after 2022. In general, the bonus depreciation percentage rates are as follows:

100 percent for property placed in service after September 27, 2017, and before January 1, 2023;

80 percent for property placed in service after December 31, 2022, and before January 1, 2024;

60 percent for property placed in service after December 31, 2023, and before January 1, 2025;

40 percent for property placed in service after December 31, 2024, and before January 1, 2026;

20 percent for property placed in service after December 31, 2025, and before January 1, 2027;

0 percent (bonus expires) for property placed in service after December 31, 2026.

Property acquired before September 28, 2017. Property acquired before September 28, 2017, is subject to the 50-percent rate if placed in service in 2017, a 40-percent rate if placed in service in 2018, and a 30-percent rate if placed in service in 2019. Property acquired before September 28, 2017, and placed in service after 2019 is not eligible for bonus depreciation. However, in the case of longer production property (LPP) and noncommercial aircraft (NCA), each of these placed-in-service dates is extended one year. Thus, a 50 percent rate applies to LPP and NCA acquired before September 28, 2017 and placed in service in 2017 or 2018, a 40 percent rate applies if such property is placed in service in 2019, and a 30 percent rate applies if such property is placed in service in 2020. They continue to apply to property acquired before the September 28, 2017, cut-off date set by Congress.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2018.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2018.

Employers. Use new withholding tables for 2018, as revised for the Tax Cuts and Jobs Act.

Individuals. Individuals who claimed exemption from income tax withholding in 2017 on Form W-4, Employee’s Withholding Allowance Certificate must file a new Form W-4 to continue the exemption for another year

All businesses. Give annual information statements to recipients of certain payments you made during 2017. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date applies only to the following types of payments:

All payments reported on Form 1099-B, Proceeds From Broker and Barter Ex-change Transactions.

All payments reported on Form 1099-S, Proceeds From Real Estate Transactions.

Substitute payments reported in box 8 or gross proceeds paid to an attorney reported in box 14 of Form 1099-MISC.

Businesses. File information returns (for example, certain Forms 1099) for certain payments you made during 2017. However, Form 1099-MISC reporting nonemployee compensation must be filed by January 31. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment.

If you file Forms 1097, 1098, 1099 (except a Form 1099-MISC reporting nonemployee compensation), 3921, 3922, or W-2G electronically, your due date for filing them with the IRS will be extended to April 2. The due date for giving the recipient these forms generally remains January 31.

Payers of gambling winnings. File Form 1096 with Copy A of all Forms W-2G issued in 2017 unless filing electronically.

Large food and beverage establishment employers. File Form 8027 and Use Form 8027-T to summarize and transmit Forms 8027 if there is more than one establishment unless filing electronically.

Note: Notice 2018-6 extended the due date for employers to furnish to individuals the 2017 Form 1095-B, Health Coverage, and the 2017 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from January 31, 2018, to March 2, 2018.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

Cybersecurity

Concerns about cybersecurity and the confidentiality of taxpayer information were paramount during the filing season. According to the IRS, its basic systems are attacked “millions of times” every day by cybercriminals looking for weaknesses. In April, IRS Commissioner John Koskinen told Congress that the agency’s basic systems are secure. However, cybercriminals did breach its Get Transcript app in 2015 and other applications are under constant probing and attack by cybercriminals.

Koskinen assured Congress that the agency is beefing up its cybersecurity staffing. The IRS has hired 55 new cybersecurity experts. However, he acknowledged that the agency’s cybersecurity head has left and the position is open. This has drawn criticism from lawmakers who have questioned why such an important job is open. Koskinen said that the lengthy government hiring process is a deterrent to hiring cybersecurity professionals and urged Congress to reinstate the agency’s fast-track hiring process.

Identity theft

Closely related to cybersecurity is tax-related identity theft. The breach of the Get Transcript App in 2015 resulted in $50 million in fraudulent refunds paid to cybercriminals, according to a government watchdog.

Because the filing season has just ended, final statistics will not be released until later this year. However, interim statistics give a snapshot of the vastness of the problem of tax-related identity theft. As of March 5, 2016, the IRS had successfully prevented the issuance of some $180 million in fraudulent refunds.

To help prevent tax-related identity theft, the IRS has enhanced its return processing filters. Many of these enhancements, the IRS has explained, are invisible to taxpayers. Other enhancements have been made working with return preparers and tax software providers.

Customer service

The IRS’s level of customer service hit historic lows during the 2015 filings season. Almost two-thirds of all calls to the IRS went unanswered and the agency disconnected millions of callers (so-called “courtesy disconnects.”) There were also long lines for in-person assistance at IRS service centers nationwide. The IRS blamed the poor customer service on budget cuts and its inability to hire more employees to answer taxpayer questions.

In December 2015, Congress gave the IRS an additional $290 million and instructed the agency to use the money to improve customer service, along with boosting cybersecurity and combating identity theft. Koskinen told Congress in April that the agency spent more than $100 million of the $290 million on customer service. As a result, the agency’s level of customer service reached as high as 65 percent during the filing season. However, that level will fall to around 50 percent for all of 2016, Koskinen said. The additional employees hired during the filing season were merely temporary employees and their employment ended with the close of the filing season, Koskinen explained.

Return processing

The IRS expects to receive some 150.6 million returns this filing season. That number includes an estimated 13.5 million returns on extension. Taxpayers on extension have until October 17, 2016 to file.

If you have any questions about the 2016 filing season, please contact our office.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended:

Section 179 expensing. The PATH Act permanently extended the Code Section 179 dollar of investment limitations at the higher $500,000 and $2 million, levels, which are adjusted for inflation for tax years beginning after 2015 (it is $500,000 and $2,010,000 for 2016). In addition, starting only in 2016, the $250,000 limitation on the amount of section 179 property that can be attributable to qualified real property has been eliminated. Further, for tax years beginning after 2015, the Code Section 179 expense deduction is now allowed for air conditioning and heating units.

Bonus depreciation. In addition to the big news that the PATH Act extended Code Section 168(k) bonus depreciation to apply to most qualifying property placed in service before January 1, 2020, it made a number of modifications, including:

replacement of the bonus allowance for qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015; and

allowance to farmers of a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for planting and grafting after 2015.

Section 181 expensing. Special Section 181 expensing for qualified film and television productions is extended for two years to apply to qualified film and television productions commencing before January 1, 2017. However, the expensing rule is also expanded to apply to qualified live theatrical productions commencing after December 31, 2015.

WOTC. The Work Opportunity Tax Credit (WOTC) has been extended five years through December 31, 2019. In addition, the credit has been expanded and made available to employers who hire individuals who are qualified long-term unemployment recipients who begin work for the employer after December 31, 2015.

Research credit. The PATH Act permanently extended the research credit that applies to amounts paid or incurred after December 31, 2014. However, a new allowance of the research credit against alternative minimum tax liability applies to credits determined for tax years beginning after December 31, 2015. In addition, a new payroll tax credit associated with the research credit applies only to tax years beginning after December 31, 2015 (Act Sec. 121(d) (3) of the PATH Act).

Military differential pay. The PATH Act extended the employer tax credit for differential wage payments made to qualified employees on active military duty has been made permanent and applies to payments made after December 31, 2014. Effective only for tax years beginning after December 31, 2015, however, the credit may be claimed by all employers regardless of the average number of individuals employed during the tax year. The credit is also no longer limited to eligible small business employers with less than 50 employees.

Teachers' classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary school teachers' classroom expenses. Additionally, for tax years after 2015, the Act includes "professional development expenses" within the scope of the deduction. These expenses include courses related to the curriculum in which the educator provides instruction.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable nonbusiness energy property credit allowed to individuals under Code Sec. 25C for two years, making it available for qualified energy improvements and property placed in service before January 1, 2017. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria.

If you have any questions about these new “extenders,” please contact our office.

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18th in 2016 because of the intersection of a weekend and a District of Columbia holiday).

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18th in 2016 because of the intersection of a weekend and a District of Columbia holiday).

One alternative is to enter into an installment payment agreement with the IRS, where taxpayers agree in writing to make monthly payments to the IRS and to reduce their tax liability to zero over a reasonable period of time. The IRS may also agree to an installment payment arrangement for back taxes. Penalties and interest may continue to accrue, although the IRS may reduce the penalties. While the IRS is authorized to enter into a partial payment installment agreement for a portion of the taxpayer’s liability, the agency has been reluctant to do this.

Form 9465

Taxpayers who cannot pay the tax liability reported on their current income tax return should submit Form 9465, Installment Agreement Request, to the IRS, to request a monthly installment plan. A taxpayer who owes more than $50,000 should provide Form 433-F, Collection Information Statement, along with the request. Taxpayers can enter into different types of agreements, including:

A traditional agreement, where they agree to make their monthly payment by check, money order, or credit card;

A direct debit installment agreement, to make automatic payments from a bank account; or

A payroll deduction agreement, with payments made by the employer from a paycheck.

The IRS charges a user fee for entering into an agreement: $120 for a traditional agreement; or $52 for a direct debit agreement. Qualifying low-income taxpayers pay a fee of $43, regardless of the type of agreement. If the agreement is restructured (because of a change in the taxpayer’s financial condition, for example), or if the IRS terminates the agreement and then agrees to reinstate it, the IRS will charge a fee of $50.

Different agreements

The IRS’s procedures include different kinds of agreements, depending on the taxpayer’s circumstances:

Taxpayers can use Form 9465 to apply for a streamlined agreement. The taxpayer must owe $50,000 or less and must pay all their taxes within 72 months or by the expiration of the collection statute of limitations (generally 10 years).

Instead of using Form 9465, taxpayers can apply for an online payment agreement, provided the taxpayer owes $50,000 or less in taxes, interest and penalties, or provided the taxpayer owns a business and owes $25,000 or less in total. A taxpayer cannot apply online for this agreement if the taxpayer owes more than $50,000.

Taxpayers who owe $10,000 or less (without interest or penalties) can enter into a guaranteed installment agreement if the taxpayer agrees to pay all taxes within three years. The taxpayer must have filed all returns and paid all taxes due for the past five years, and cannot have entered into an installment agreement in the same period.

A taxpayer who can make full payment within 120 days should not use Form 9465 but should instead call the IRS phone line to make arrangements. There is no user fee.

Yes, the IRS can impose penalties if a tax return is not timely filed or if a tax liability is not timely paid. As with all IRS penalties, the rules are complex. However, a taxpayer may avoid a penalty if he or she shows reasonable cause.

Yes, the IRS can impose penalties if a tax return is not timely filed or if a tax liability is not timely paid. As with all IRS penalties, the rules are complex. However, a taxpayer may avoid a penalty if he or she shows reasonable cause.

Failure to file

The penalty for failure to file a timely return is five percent of the net amount of tax due for each month or partial month of the delinquency, up to a maximum of 25 percent. The penalty runs from the due date of the return until the date the IRS actually receives the late return. If the failure to file an income tax return extends for more than 60 days, the penalty may not be less than the lesser of $135 (subject to annual inflation adjustments) or 100 percent of the tax due on the return. The penalty applies to the net amount due, which is the tax shown on the return and any additional tax found to be due as reduced by any credits for withholding and estimated tax payments.

Failure to pay

The failure-to-pay tax penalty is generally one-half of one percent of the amount of the unpaid tax for each month of the delinquency, up to a maximum of 25 percent for 50 months. For failure to pay tax shown on the return, the penalty is imposed on the amount shown on the return, less amounts that have been withheld, estimated tax payments, partial payments and other applicable credits. For failure to pay a deficiency within the number of days allotted after the date of a notice and demand, the penalty is imposed on the tax stated in the notice, reduced by the amount of any partial payments.

Overlap

Complexity enters when a taxpayer is subject to both the failure-to-file and the failure-to-pay penalty. In this case, the failure-to-file penalty is generally reduced by the amount of the failure-to-pay penalty. Every taxpayer’s situation is unique, so please contact our office for more details.

Reasonable cause

The failure-to-pay penalty does not apply if the taxpayer shows that the failure-to-pay was due to reasonable cause and not to willful neglect. Generally, the taxpayer must pay the tax due before the IRS will abate a failure-to-pay penalty for reasonable cause.

Certain entities

The Tax Code authorizes the IRS to impose specific penalties on certain entities that fail to file returns. These include a partnership that is required to file a partnership return but does not timely do so, or files a return that does not contain the required information; and an S corporation that is required to file its information return but does not timely do so, or files a return that does not contain the required information, and certain persons with certain interests or stock in a foreign partnership or corporation, among other entities.

Penalties are one of the most complex areas in the Tax Code. If you have any questions about penalties, do not hesitate to contact our office.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

Tax-related identity theft

Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.

Being proactive

However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.

Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.

Impersonators

Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.

The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.

Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.

There are three main types of IRS audits: correspondence audits, office audits, and field audits (listed in order of increasing invasiveness). Correspondence audits are initiated (and generally conducted) by postal mail. Office audits require a taxpayer and/or its representative to appear in an IRS office; and a field audit involves IRS examiners paying a visit to the taxpayer's place of business.

There are three main types of IRS audits: correspondence audits, office audits, and field audits (listed in order of increasing invasiveness). Correspondence audits are initiated (and generally conducted) by postal mail. Office audits require a taxpayer and/or its representative to appear in an IRS office; and a field audit involves IRS examiners paying a visit to the taxpayer's place of business.

Correspondence audits

Correspondence audits, as the name suggests, are conducted entirely through the U.S. mail. (The IRS never uses e-mail to correspond with taxpayers.) Correspondence examinations require less involvement from IRS examiners and are therefore used more frequently by the budget-strapped IRS. Because correspondence examinations make up such a large percentage of the total examinations the IRS conducts, they are considered the "work horse" of the IRS audit tools.

The IRS routinely uses correspondence examinations for issues that it generally deems more efficient and less burdensome to handle by mail, for example questionable claims for earned income tax credits (EITCs) or inconsistent line items.

Office audits

Generally, office examinations involve small businesses or individual income tax returns that predominantly include sole proprietorships. They involve issues that are too complex for a correspondence audit, which involves only the exchange of mail and (sometimes) a few telephone calls. Issues subject to an office audit, however, are usually not complex enough to warrant a full-scale field audit examination. Common issues include the substantiation of a business purpose, travel and entertainment expenses, Schedule C items, or certain itemized deductions.

In addition, if a taxpayer previously selected for a correspondence audit requests an interview to discuss the IRS's proposed adjustments, the case may be moved to the taxpayer's district office. Conversely, an examiner may sometimes determine that a tax return selected for an office audit examination would be better handled through a correspondence audit.

Office examinations generally take place at the IRS office located nearest to where taxpayer maintains its financial books and records, which is generally its residence or place of business. However, on a case-by-case basis the IRS will consider written requests from taxpayers or their representatives to change the office examination location. A request by a taxpayer to transfer the place of an office examination will generally be granted if the current residence of the taxpayer or the location of the taxpayer's books, records, and source documents is closer to a different IRS office than the one originally designated for the examination. Additionally, Treasury Reg. 301.7605-1(e)(1) directs the IRS to consider several factors including whether the selected office audit location would cause undue inconvenience to the taxpayer.

Field audits

The IRS initiates a field exam audit usually by sending either a letter that lays out the issues to be examined and lists a specific IRS agent as the point of contact. Taxpayers must contact the revenue agent within 10 days of receiving the initial contact letter in order to schedule an interview. Generally an Information Document Request (IDR) also accompanies the initial contact letter and contains the IRS examiner's description of the audit-related documents it wants to review.

Conducting a field examination of a tax return requires the agent to have far greater knowledge of tax law and accounting principles than do correspondence or office audits, and therefore, field examiners are generally much more experienced than other examiners. Field audits almost always take place where the taxpayer's books, records, and other relevant data are maintained, which generally means the taxpayer's residence or place of business. However, if a business is so small that a field examination would essentially require the taxpayer to close the business or would unduly disrupt the operation of the business, the IRS examiner can conduct the field examination at the closest IRS office or at the office of the taxpayer's representative.

Employers and other organizations must obtain an employer identification number (EIN) to identify themselves for tax administration purposes, such as starting a new business, withholding taxes on wages, or creating a trust. Entities apply for an EIN by filing IRS Form SS-4. Page two of the form advises whether an applicant needs an EIN.

Employers and other organizations must obtain an employer identification number (EIN) to identify themselves for tax administration purposes, such as starting a new business, withholding taxes on wages, or creating a trust. Entities apply for an EIN by filing IRS Form SS-4. Page two of the form advises whether an applicant needs an EIN.

Other entities that need an EIN include corporations, partnerships, estates, trusts, state or local governments, and churches and other nonprofit organizations. Unincorporated entities (sole proprietorships) that establish a retirement plan or that file certain tax forms will also need an EIN for filing the relevant forms.

Application process

The IRS does not charge for obtaining an EIN and has sought to simplify the application process. Taxpayers may apply by mail, by fax, or online. International applicants may also apply by phone. In all cases, if the IRS determines that the applicant needs an EIN, the IRS will issue the EIN and transmit it to the taxpayer in the same manner as the application was made.

Applications by mail generally take four weeks, the IRS indicates, once the SS-4 is properly and completely filled out. Entities located in the U.S. or a U.S. territory can apply online. For online applications, the IRS validates the information and issues the EIN immediately. The IRS notes that the principal officer or other relevant party must have a valid taxpayer identification number, such as a Social Security Number, to use the online application process. The IRS will respond to a completed fax application within four business days, if the applicant provides a fax number.

Filing without EIN

The IRS states that it will only issue one EIN per day per responsible party, regardless of the means of applying. If the taxpayer needs to file a return but lacks an EIN because of this limitation, the IRS advises that the taxpayer should attach a completed Form SS-4 to the completed and signed tax return. The IRS will assign an EIN and then process the return.